Sitting in one of my favorite restaurants in Addis Ababa, the lights flicker on and off–it’s as if the doorman is playing jokes on the clientele. But this is not the doorman, but rather a normal occurrence in Africa. When discussing energy in Africa, my friends and I usually pose the simple question that supposedly captures the local energy situation in a given country: “How many times did the power go out while you were there?” Six times for one week in Dakar. For two hours every other day in Addis Ababa. Every other day in Luanda. Every day in Lagos. And so on.

Driving this all-too-common conversation is that 59 percent of Africa’s population is without access to electricity, according to a 2011 report by the African Union, as compared to 21 percent in developing nations in Asia.

As a part of the Fast Moving Consumer Goods series, this article looks at energy in Africa, which is emerging as major investment need as well as a growing challenge to manufacturing and production in Africa. According to the same 2011 report by the African Union, Africa has 15 percent of the world’s population but only accounts for 3 percent of the world’s energy consumption. With the energy demand growing rapidly, the energy deficit will become a greater burden on Africa’s long term growth.

Africa’s need for power and energy is not a new story. It has been the topic of conversation since the 1970s. Yet, from the 70s through the early 90s, many attempts at large energy projects failed under the auspices of dictators and corrupt leaders. Countries lacked the skilled labor force to sustain the energy industry which is still a concern but improving. In speaking to energy experts, it is believed that some countries have less than 20 percent of the power plants built throughout the 70s and 80s still operating.

Energy in Africa: Development Financial Institutions and Commercial Banks

With economies growing, the political dynamic of Africa has changed. The amount of serious conflicts in Africa has decreased year-on-year and political stability has become more commonplace. The fear of leaders pilfering off private investment is not the challenge anymore. Rather, the new challenges are more predictable–but still immense and complicated. These challenges include procuring long term and substantive amounts of capital investment and navigating regulatory regimes.

The power projects needed in Africa today are mega projects that run between $2 million to $8 million per MW, depending on the technology employed. For example, a 250 MW project can run between $500 million and $2 billion. Most financial institutions in Africa simply cannot support such mega projects by themselves. Accordingly, most sponsors for these projects play a tough role of balancing investment interests, and risks and returns for multiple parties to secure large scale financing. These parties including development financial institutions (DFIs), commercial banks, private funds and individuals, and national institutions.

This process involves loan syndication, guarantees from export credit agencies, DFI loans, and an extensive process on negotiating fees and costs for feasibility tests and technical advisors among other many other things on the back end. Notably, equity participation in Africa power projects generally hovers around 15 to 30 percent with the higher end sometimes involving projects sponsored by government institutions receiving financial support for their participating equity from the same DFI participating on the debt side. Thus, the loan amount required means that DFIs and commercial banks will always play a big role in energy in Africa in the near future.

It is imperative to ensure there is a demand to meet the cost of the project. This process often involves securing a power purchase agreement (PPA) with a national grid company or another electricity buyer (off-taker). In Africa, this often involves working with a government-owned electricity company. As a result, investors must navigate the regulatory regimes of 54 countries that cannot easily be coupled together based on language and/or culture let alone available resources. Understandably, some countries are very new to the PPA structure yet are open to bridging the experience gap with a reliable and honest partner.

Energy in Africa: Oil, Natural Gas, and Renewables

Also part of the regime challenge is how certain governments view certain energy sources. Algeria, Nigeria and Libya are active members of the Organization of the Petroleum Exporting Countries (OPEC) with other African countries, including Angola, growing as players in the oil market. Yet, oil may not be the gold of Africa.
As African countries discover more and more natural gas, the continent has the opportunity to boost its own energy sources. “One can imagine that if African countries converted some of their natural gas reserves into use for locals and neighboring countries that energy deficits in African countries would shrink immediately,” said one African energy investor, “but this generally is not the thinking.”

Hydropower is beloved in Ethiopia where the government’s planned hydro dam could make the country a growing exporter of energy by 2015 while it is constantly questioned in Tanzania because of the challenges with some past projects. It is hard to know which source governments will be most attracted to.
Despite its fall from grace in many developed countries, nuclear power has come up in conversation in some African countries. “It is usually not the easiest intro to say that you think nuclear energy has some potential as prices drop on needed supplies to get a plant up,” says one investor “but some African leaders have taken a second look at its potential.”

Another growing interest amongst Ministers of Energy is the renewable energy sector. According to the Frost & Sullivan’s study “Mega Trends in Africa: A bright vision for the growing continent,” investment in renewable power in Africa is expected to grow from $3.6 billion in 2010 to $57 billion in 2020. Geothermal experts are confident that there is great geothermal potential along the East Africa Rift in Ethiopia, Djibouti, Kenya, Uganda, and Tanzania.

Wind potential is untapped along the huge coastline of West Africa but the talk out of Senegal is that the government may be looking to play a role in changing that. Mozambique, a country with growing coal reserves, recently issued a request for proposals (RFP) for wind.
Granted, I mention the coal reserves in Mozambique because one has to imagine what energy boom the country could have with its own coal power plant. Technical expertise and work force is a huge challenge but investors and governments are going to have to go through this growing pain just like every other energy producing country in history.

In the end, whether it is hydropower or the hard-to-imagine-in-Africa coal and natural gas power plants, the resources are there and African leaders are ready to work with investors in order to realize opportunities and returns for a reasonable price. And when those investors and governments find the middle ground, the continent as a whole will benefit. No more walking at night with flashlights, no more factory blackouts, and more booming growth for a continent that I love.

———-

Kurt Davis Jr. is a Senior Associate with Schulze Global Investments in its Ethiopia office. He is a private equity professional and early business/start-up consultant with experience in Sub-Saharan Africa and North Africa, Asia, Europe and United States. He is an avid traveler who has been to 60+ countries throughout the world in search of new investment opportunities, new people, and better understanding of the world. His international professional career also includes positions with Kukula Capital, African Development Bank, Swicorp S.A., Bear Stearns, Citigroup Smith Barney, and Skadden, Arps, Meagher, Slate & Flom. His experience covers the agri-processing/food processing, construction, fast-consumer moving goods (FMCG), energy & infrastructure, manufacturing, natural resources and real estate sectors. Mr. Davis holds a Master in Business Administration (M.B.A.) degree from the University of Chicago Booth School of Business, Juris Doctor (J.D.) degree from the University of Virginia School of Law, and Bachelor of Arts (B.A.) degree from University of Virginia, having also taken classes and/or studied in Ghana, Nicaragua, France, and Brazil. He is a registered lawyer with the New York State Bar and the Massachusetts State Bar. He has also passed CFA Level I and II and speaks English, French, Portuguese and Spanish. He can be reached at kurt.davis.jr@gmail.com.